“I am going to tell you a story about greed, excessive risk-taking, fraud that we believe was both serious and massive, and the complete economic collapse that befell a remote land.” This is how Gunnar Andersen the director of FME (the Icelandic Financial Services Authority recently described the new Icelandic saga of the collapse of the three Icelandic banks, Glitnir, Kaupthing and Landsbanki, in Oct. 2008. Authorities in Iceland and the UK Serious Fraud Office are now investigating this saga. Just this week, the Luxembourg police, together with Icelandic investigators, altogether almost 50 people, carried out an extensive house search at several premises in Luxembourg, centred on the former Kaupthing Luxembourg, now Banque Havilland (bought in summer 2008 by the English Rowland family through its investment company, Blackfish Capital).

I’m just back in London after three weeks in Iceland, my 6th trip to Iceland since Oct. 2008. As usual, I tried to meet as many people as possible – journalists, academics, civil servants, politicians, bankers or former bankers, investors, clients of the banks and, when possible, some of those closely connected to the collapsed banks through ownership (though most of them are getting less willing to talk, even off-the-record since many of them now face prosecution or know they soon will). The more people I talk to and the more I look into the operations of the banks and their closest circle the better idea I get of what Andersen might mean with ‘both serious and massive’ fraud.

Before the banks collapsed foreigners often asked me if I thought the Icelandic banks were sound institutions. My standard answer was that though the ability of Icelandic regulators might be doubted the banks were no dingy back street shops but operated in the full glare of the authorities in many properly, or so we thought, regulated countries. The three banks and their Icelandic satellite investment companies such as Baugur, Milestone, FL Group, Fons and Samson, now all bankrupt, and Exista, surviving at the mercy of its creditors, made headlines in the international media for years, the tone usually either admiring or tinged with suspicion. As early as 2006 I heard that both the Danish Central Bank and the Danish FSA kept a close eye on the Icelandic banks and businesses buying up Danish assets. Though persistent rumours of foul play tailed them wherever they went the rumours never instigated an investigation – until recently.

I travelled to Iceland for the publication of the long-awaited report by the Parliament’s Investigative Commission, www.rannsoknarnefnd.is, nicknamed in English the ‘Truth Commission’ (in Icelandic it’s just called the Investigative Commission). The report was due at the beginning of Feb. but is now expected at the end of this month. Its chairman has already declared to the Icelandic media that rarely has any commission presented such an ugly story to its nation.

With the foreboding of ‘both serious and massive’ fraud it’s clear that there isn’t much happy tiding in the report. However, the good news is the fact that this report was done and is about to be finished. As far as I can judge, without having seen anything from the report, it will be a thorough job of 2000 pages, part of which is written by a sub-commission focusing on ethical aspects. This will be the only extensive report as to yet in any country on the effect of the banking crisis – most appropriately in the country most dramatically hit so far.

What could the ‘serious and massive’ fraud consist of? I don’t think the Ikaruses in the Icelandic banks and businesses invented anything new but they might have taken things to higher levels than bankers in any major banks would dare. Extensive market manipulation in all the banks, driven by the highest echelons in the banks in conjunction with their major owners and related parties, is already being investigated. Opaque ownership has for years characterised Icelandic companies and might have been used to stay under takeover trigger. Assets were most likely siphoned off through companies related to the banks. There is evidence to suggest that when the banks started to offer mortgages they strategically traded mortgage-related bonds in order to push up interest rates in the market. – There is no lack of possibilities here.

These are only few of the schemes that might have been used and are most likely being investigated. Except for the last one they are all tricks often found in companies facing bankruptcy. The feeling in Iceland is that the 2000 pages will takes us far into this murky story; it won’t be a joyous read for bankers, politicians and regulators. Although I’m going to resist the claim that the report will be an example for others to follow it will for sure tell an interesting story of political vanity, a deep and extensive failure of public control – and fraud.